PLANT LOCATION AND LAYOUT

Plant location or the facilities location problem is an important strategic level decision making
for an organization. The plant location should be based on the company’s expansion plan and
policy, diversification plan for the products, changing market conditions, the changing sources of
raw materials and many other factors that influence the choice of the location decision.
REASONS FOR A GLOBAL/FOREIGN LOCATION
Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:
Reaching the customer: One obvious reason for locating a facility abroad is that of capturing a
share of the market expanding worldwide.
The other tangible reasons could be as follows:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that foreign
country. This may be due to lower labour costs, lower raw material cost, better availability of the
inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a foreign
country rather than exporting the items to that country.
Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as follows:
i. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel secure that
the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
ii. 2. Organizational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced country. The
firm can learn from advanced research laboratories/universities in that country. Such learning may
help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may have
to be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant
there, it will have intensive interaction with the suppliers in that country from whom there may be
much to learn in terms of modern and appropriate technology, modern management methods, and
new trends in business worldwide.
3. Other Strategic Reasons
(a) The firm by being physically present in the host country may gain some ‘local boy’ kind of
psychological advantage. The firm is no more a ‘foreign’ company just sending its products
across international borders. This may help the firm in lobbying with the government of that
country and with the business associations in that country.
(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
(d) The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for the
firm. If one market goes slow the other may be doing well, thus lowering the overall risk.

FACTORS INFLUENCING PLANT LOCATION/FACILITY LOCATION

Facility location is the process of determining a geographic site for a firm’s operations.
It is appropriate to divide the factors, which influence the plant location or facility location on the
basis of the nature of the organisation as:

1. General locational factors, which include controllable and uncontrollable factors for all type
of organisations.
2. Specific locational factors specifically required for manufacturing and service organizations.
Location factors can be further divided into two categories:
1. Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs.
2. Secondary factors also are important, but management may downplay or even ignore
some of them if other factors are more important.

General Locational Factors

Following are the general factors required for location of plant in case of all types of organisations.

Controllable Factors
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages
6. External economies
7. Capital

Uncontrollable Factors
1. Government policy
2. Climate conditions
3. Supporting industries and services
4. Community and labour attitudes
5. Community Infrastructure

Controllable Factors
1. Proximity to markets: Every company is expected to serve its customers by providing goods
and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product.
2. Supply of raw material: It is essential for the organization to get raw material in right qualities
and time in order to have an uninterrupted production.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw
materials to the company and finished goods to the customers. The transport facility is a
prerequisite for the location of the plant.
4. Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of industries
are power hungry e.g., aluminum and steel and they should be located close to the power station
or location where uninterrupted power supply is assured throughout the year.
5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location..

6. External economies of scale: It refers to advantages of a company by setting up operations

in a large city while the second one refers to the “settling down” among other companies of related
Industries. In the case of urbanization economies, firms derive from locating in larger cities rather
than in smaller ones in a search of having access to a large pool of labour, transport facilities, and
as well to increase their markets for selling their products and have access to a much wider range
of business services.
7. Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. For example, large
Multinational Corporations such as Coca_Cola operate in many different countries and can raise
capital where interest rates are lowest and conditions are most suitable.
Uncontrollable Factors
1. Government policy: The policies of the state governments and local bodies concerning
labour laws, building codes, safety, etc., are the factors that demand attention.

2. Climatic conditions: The geology of the area needs to be considered together with
climatic conditions (humidity, temperature). Climates greatly influence human efficiency and
behaviour. Some industries require specific climatic conditions e.g., textile mill will require
humidity.
3. Supporting industries and services: Now a day the manufacturing organization will not
make all the components and parts by itself and it subcontracts the work to vendors.
So, the source of supply of component parts will be the one of the factors that influences the
location.
4. Community and labour attitudes: Community attitude towards their work and towards
the prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria.
5. Community infrastructure and amenity: All manufacturing activities require access to
a community infrastructure, most notably economic overhead capital, such as roads, railways, port
facilities, power lines and service facilities and social overhead capital like schools, universities
and hospitals.

SPECIFIC LOCATIONAL FACTORS FOR MANUFACTURING ORGANISATION

Dominant Factors
Factors dominating location decisions for new manufacturing plants can be broadly classified in
six groups. They are listed in the order of their importance as follows.
1. Favorable labour climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs

1. Favorable labour climate: A favorable labour climate may be the most important factor
in location decisions for labour-intensive firms in industries such as textiles, furniture, and
consumer electronics. Labour climate includes wage rates, training requirements, attitudes toward
work, worker productivity, and union strength..

2. Proximity to markets: After determining where the demand for goods and services is
greatest, management must select a location for the facility that will supply that demand. Locating
near markets is particularly important when the final goods are bulky or heavy and outbound
transportation rates are high. For example, manufacturers of products such as plastic pipe and
heavy metals all emphasize proximity to their markets.

3. Quality of life: Good schools, recreational facilities, cultural events, and an attractive
lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it can
make the difference in location decisions.

4. Proximity to suppliers and resources: In many companies, plants supply parts to other
facilities or rely on other facilities for management and staff support. These require frequent
coordination and communication, which can become more difficult as distance increases.

5. Utilities, taxes, and real estate costs: Other important factors that may emerge include
utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by
local or state governments, relocation costs, and land costs.

Secondary Factors
There are some other factors needed to be considered, including room for expansion, construction
costs, accessibility to multiple modes of transportation, the cost of shuffling people and materials
between plants, competition from other firms for the workforce, community attitudes, and many
others. For global operations, firms are emphasizing local employee skills and education and the
local infrastructure.